Taxation on the Sale of Common Property

Divide and Prosper

Situation: A Strata Corporation sells a strata lot which it had owned, usually used as a caretaker or guest suite. The net proceeds are distributed to the Owners after a vote to do so is obtained: do they, or the Strata, owe tax on it?

GAAP does not apply

The proceeds of the sale would be a kind of income called a Capital Gain, and it would be lessened by any book value of the strata lot that would then be removed from the balance sheet.

A strata lot owned by its Strata Corporation would not necessarily have a book value, depending on the Strata’s practices. While commonly cited, the fact is Generally Accepted Accounting Principles (GAAP) are not required to be followed by a Strata preparing its own financial statements. Otherwise, the main reason for the cost of a Strata Corporation-owned suite to be reflected on its balance sheet would be that the Strata Corporation had to pay for it at some point, and this is not usually the case. At any rate, this would only impact the accounting “gain”.

The Strata Corporation is “unlikely” to be taxed on the capital gain, based on the provisions of the Income Tax Act Section 149(1)(l) which will generally apply to a Strata Corporation (even a commercial one),  as long as the pursuit of profit is not the end in itself.

CRA Ruling regarding locker sales

On your non-profit status, all depends

The Canada Revenue Agency (“CRA”) allows non-profit status where this describes the primary organizational purpose. Depending on the format of the annual budget presented to owners, a planned excess of revenues over expenses might present as a surplus budget. Most often, it is due to the mandated need to recover a deficit, the amount of which may alternatively be incorporated into the budget as a line item, thereby removing the appearance of a surplus budget. In other cases, the Strata Corporation may intentionally build up a reasonable operating reserve, fully congruent with a non-profit purpose. But where the planned surplus has no such context, we enter the realm where the CRA might question the Strata Corporation’s Non-Profit Organization (“NPO”) status.

As stated, “unlikely”, bearing in mind every situation is assessed by CRA on its own merits. Other factors might include whether the Strata Corporation has more than one such unit, how much rental income it earned for the Strata Corporation in the past, and whether the proceeds were distributed to the Owners. The Strata Corporation’s valid NPO status gives somewhat of a boiler plate assurance.

Not Sauce for the Goose

For the Strata Corporation, this tax free status endures even if the proceeds are made available to Strata Lot Owners, which is often a main motivation for having conducted the transaction.

The Strata Lot Owners, however, have received income, and must report it as such on their income tax return. Basically, everything is income unless it is specifically exempted:

CRA’s non taxable income sources

The nature of the payment as a capital gain does not translate through the veil of the Strata Corporation, so the more favorable tax treatment of that kind of income is not available to them.

When would it be? If the property sold was common property (as opposed to a designated strata lot), Section 66 of the Strata Property Act provides that it was owned proportionately by all Owners as “tenants in common”, and the Strata Corporation would not technically incur any gain (or loss). The Owners would incur and report the gain, subject to a lower tax rate than straight income.

The preceding is intended to benefit interested readers by promoting discussion and should not be construed as legal or tax advice. Readers seeking such advice should consult their legal and tax professionals.

Neil Sideen is a CGA/CPA and Controller at C& C Property Group Ltd.

C & C Property Group Ltd. is a strata property management companies with clients in the metro Vancouver area